Points-based systems attract workers who look good “on paper” but are not necessarily the best fit for employers

A more business friendly approach would be to auction work visas to employers

Auctioning visas would promote economic growth and allow government to raise funds to spend on addressing concerns about pressures on public services and low-skilled wages

With just over one year to go until Britain leaves the European Union, the country must design an immigration system that can win popular support. Building on the work of Nobel Prize winning economist Gary Becker, labour economists Pia Orrenius and Madeline Zavodny argue that auctioning employer permits to hire foreign workers, provided security checks are met, would maximize the economic benefits of immigration and increase government revenue. The Adam Smith Institute’s new report comes at a time that the UK has to decide on how it will manage immigration. It’s time to kick-start a mature debate on how we organise this system.

At present the UK has two migration systems. The first, for non-EU migrants, has five tiers for work- and study-based visas as well as additional channels for family migration and humanitarian migrants. The second is the free movement regime that the UK has with the European Union, which grants EU citizens preferential access. As we prepare to leave the EU, the government has made clear it is seeking to control numbers, the skill level of migrants, their length of stay and the benefits they receive.

It might be easy for the UK government to simply fold the EU into the existing skills-based tiered system. While doing so might enable the Conservatives to hit their goal of reducing annual net inflows to the tens of thousands, it would come at considerable economic cost with businesses hit by labour shortages and consumers facing higher prices for goods and services, the report suggests. Points-based immigration systems, as used by Canada and Australia, tend to attract workers who look good “on paper” but are not necessarily the best fit for employers.

Instead, the UK should consider auctioning employment visas to employers. Auctions are a flexible alternative to complex points-based systems and replace central planning with employers’ bottom-up knowledge. By allocating visas to the firms that value migrant labour the most the policy has the potential to boost economic growth and government revenues.

Visas purchased by companies could be resold, while foreign workers would be allowed to move across employers with a visa, to ensure workers’ rights are protected. With the Migration Advisory Committee providing advice or setting a target number of visas up for auction, it would be responsive to changes in UK economic conditions and the demand for foreign workers. Changes in permit prices would act as a signal to increase or reduce the numbers of permits available in auctions in future years.

The UK should consider separate auctions for high- and low-skilled permits, with low-skilled permits reserved for foreign workers who will earn less than a certain amount or work in certain occupations or industries. Creating another separate auction of short-term permits for seasonal foreign workers, such as those working in agricultural jobs or at holiday resorts, might also be advisable.

Visas as currently constructed are not free. At present a typical Tier 1 exceptional talent applicant pays ₤585 to apply, while a typical Tier 2 general applicant for a three-year visa pays between ₤587 and ₤1267 (although less if in a shortage occupation). Sponsoring employers of Tier 2 and Tier 5 workers also pay an Immigration Skills Charge of up to ₤1476. Thousands more are paid in legal fees to lawyers as applicants and employers attempt to prove need and skills. An auction system would allow the government to streamline the process, make it more responsive to business requirements, and capture funds currently spent on legal costs.

The paper also draws on extensive research to conclude that immigration has had negligible effects on employment, unemployment, or the earnings of people born in the UK. However, some research suggests that low-skilled immigration slightly lowers the earnings of low-paid workers, with the most-negative effects on wages felt among other immigrants.

Immigrants to the UK contribute more to taxes than they consume in terms of public benefits and services. Immigrants from countries that joined the EU in 2004, including Poland, Hungary and Lithuania, are strongly net positive contributors to the UK government’s coffers.

Immigration responds to and generates more economic activity, the report suggests, with the economy especially able to absorb higher migrant rates during times of expansion. Extensive research finds migration leads to greater levels of trade, innovation, and productivity gains. Report authors Zavodny and Orrenius report that migration increases patent activity and productivity, and in the UK has been instrumental in retaining the City of London’s pre-eminent position at the centre of global finance.

Immigration was named by 73% of those who voted leave as a concern in the British Social Attitude survey immediately after the EU referendum. But instead of using Brexit as a means toward reducing immigration from the EU, the UK government should seize it as an opportunity to design an immigration system that best strengthens the country’s economy. Creating an auction system would be a bold move that would maximize the economic benefits from immigration while possibly bolstering public support for immigration.

Madeline Zavodny, author of the report and Professor of Economics at University of North Florida, said:

“The UK has a unique opportunity to replace its immigration system with one that would benefit the economy and increase support for immigration. Auctioning visas to employers is the best way to bring in talented workers who contribute to the economy while minimizing any harms to UK natives. It would also generate funds that could be used to achieve other public goals.”

Sam Dumitriu, Head of Research at the Adam Smith Institute, said:

“It is vital that the UK’s post-Brexit immigration policy is informed by evidence. This important report by two distinguished economists reviews extensive empirical research to develop the framework for a innovative immigration policy that meets the UK’s specific economic requirements and improves the public’s support for immigration.”

About the authors:

Madeline S. Zavodny is a Professor of Economics at the University of North Florida. She is also a Research Fellow at the Institute of Labor Economics (IZA), a Fellow at the Global Labor Organization, and an Adjunct Scholar at the American Enterprise Institute. Much of her research focuses on economic issues related to immigration, including Beside the Golden Door: U.S. Immigration Reform in a New Era of Globalization (AEI Press, 2010) and The Economics of Immigration (Routledge, 2015). Her research on immigration has also been published in the Journal of Labor Economics, Industrial and Labor Relations Review, the Journal of Policy Analysis and Management and Demography, among others. Before joining UNF she was a professor of economics at Agnes Scott College and Occidental College and an economist with the Federal Reserve Bank of Atlanta and the Federal Reserve Bank of Dallas.

Pia M. Orrenius is Vice President and Senior Economist at the Federal Reserve Bank of Dallas where she works on regional economic growth and demographic change. She manages the regional and microeconomics group in the Dallas Fed Research Department. Her academic research focuses on the labor market impacts of immigration, unauthorized immigration and U.S. immigration policy. She is coauthor of the book Beside the Golden Door: U.S. Immigration Reform in a New Era of Globalization (2010, AEI Press). She is research fellow at the Tower Center for Political Studies at Southern Methodist University and at the IZA Institute of Labor in Bonn, Germany, as well as adjunct scholar at the American Enterprise Institute. Orrenius is also adjunct professor at Baylor University (Dallas campus), where she teaches in the executive MBA program. Orrenius was senior economist on the Council of Economic Advisers in the Executive Office of the President, Washington D.C., in 2004–05, where she advised the Bush administration on labor, health and immigration issues. She holds a PhD in economics from the University of California at Los Angeles and bachelor degrees in economics and Spanish from the University of Illinois at Urbana—Champaign.

PLEASE NOTE: The views expressed here are solely those of the authors and do not reflect those of the Federal Reserve Bank of Dallas or the Federal Reserve System.

Notes to editors:

For further comments or to arrange an interview, contact Matt Kilcoyne, Head of Communications, matt@adamsmith.org | 07584 778207.

After the Prime Minister's speech in central London this morning on tackling the housing crisis Sam Dumitriu, Head of Research at the Adam Smith Institute, speaks out on Mrs May's policy priorities:

"The Campaign to Prevent Real Estate may object, but the Prime Minister is right to take-on NIMBY councils in high-demand areas. Restrictions on new development push rents up and hold back productivity by pricing workers out of the best jobs. But we must go further and build on the Green Belt.

“Building on the Green Belt doesn’t mean ugly sprawl or trashing the environment. If we only freed up intensively farmed land within a ten-minute walking distance of a train station for development, we could build one million new homes.”

“Paying executives for generating profit rather than building homes may seem perverse to Mrs May, but the alternative would create even worse incentives. In a market economy, executive pay should be determined by shareholders, not by compliance with the government’s five year plan.

“We shouldn’t blame land banking for slowing down construction. The uncertainty of the planning system incentives housebuilders to build up a pipeline of permissions. Without it, withdrawn permission could leave builders, tools and cement mixers sitting idle."

As Jeremy Corbyn comes out to support a customs union with the European Union risks throwing away the key benefits from Brexit. Matt Kilcoyne, Head of Communications at the Adam Smith Institute, says:

"Jeremy Corbyn’s latest position on Brexit makes little sense. A customs union with Europe, while walking away from the single market threatens any potential gains from Brexit and Corbyn's hostility to America will also hurt British consumers.

"The customs union of the European Union is dominated by continental manufacturing interests. Britain could be nimbler in its approach than the EU has managed over the past four decades and draw down its tariff structures on third countries to reduce costs for consumers while boosting trade (be it with the developing world or with the largest economies like America and China). Corbyn says that he doesn’t want the UK to become a rule taker but that is precisely what this proposal will see us end up as. The UK is the tenth largest trader in the world. In 2016, the United Kingdom exported $404bn and imported $625bn. We should make the most of this opportunity to be the bastion for free trade with the rest of the world, not be shackled to institutions and decisions made in Brussels without our say.

"A comprehensive free trade deal with the USA could open up a market of 323m to our world-beating financial services, high-quality food, legal services and cars – while driving down costs for consumers here. Corbyn might be getting all in a flap about chlorine chicken in an FTA but EU institutions like the European Food Safety Authority he so lauded have said it was safe to eat time after time. Throwing away the chance for trade deals with the USA by hamstringing the UK to a customs union with the EU would be like buying a chicken burger, throwing out the meat, and eating the wrapping."

For further comment or to arrange a interview please contact Matt Kilcoyne (matt@adamsmith.org, 07584778207, 02072224995).

Following David Davis' speech this morning where he called on European Union partners and member states to agree mutual recognition on the basis of trust the Adam Smith Institute says that the government's Brexit secretary is speaking sense. Matt Kilcoyne, Head of Communications at the ASI, said:

"When talking about trade we often hear of the importance of rule makers and rule takers. Most countries though know that in some things they make the rules, in others they take them. It will be the same for Britain as we leave the EU. In insurance, in banking, in legal contracts and many commodities it is British rules that are the basis of global trade. In goods we've worked for four decades with European partners to set global standards.

"The Adam Smith Institute has argued in favour of mutual recognition before and it makes sense that we'll seek to mutually recognise the work of institutions that we've helped to build. Use of a single set of approvals boosts trade by removing barriers and time costs.

"But it mustn't stop at the borders of Europe. The safety of medical devices in the USA, Switzerland, and Canada are just as good as those found on the continent. Cars from Japan are just as safe as those sold by German manufacturers. At the heart of this issue is trust. Governments should trust each other, just as multinational companies do in their supply chains. If we want a globally facing Britain we'd do well to support further mutual recognition and trust between our allies."

For further comment or to arrange an interview please contact Matt Kilcoyne (07584778207, 02072224995, matt@adamsmith.org).

Prediction markets, allowing people to trade on bank’s solvency, would punish excessive risk taking and create a more sustainable financial sector

Ten years on from the financial crisis, a new report by the Adam Smith Institute urges the government to scrap the Bank of England’s 2% inflation target and move to a new system that targets nominal income.

Conventional monetary policy by central banks used interest rates control inflation, but since the financial crisis a decade ago, the central bank has used emergency asset purchases (i.e quantitative easing). A move to nominal income (NGDP) targeting would mean more accurate and responsive decisions made by the Monetary Policy Committee (MPC) by allowing a single focus on aggregate demand.

The price system is meant to reflect real scarcities – and so supply shocks should be reflected in inflation data with policymakers trained to ‘see through’ them. The central bank itself is described as being the primary cause of demand shocks. As nominal income is demand, NGDP targeting avoids requiring ratesetters to distinguish between supply and demand shocks and increases stability.

Decisions on asset purchases by the MPC at present are discretionary and arbitrary. While forward guidance has been issued, it is sometimes seen as publicly committing the bank to future actions and sometimes seen merely as a forecast of where the economy is headed. Instead the Bank of England should move to a rules-based system, the report argues. The MPC should clearly set out the amounts and types of assets the Bank will hold in each scenario. For example, if the Bank of England owns more than a certain percentage of gilts of a specified maturity, they then extend asset purchases to a pre-announced basket of investment-grade bonds.

Monetary policy since the crisis, including consistently near-zero interest rates have prompted destabilising capital flows and driven large swings in emerging market currencies, increased the costs of pension provision, and encouraged speculation in commodities. With open market operations limited in scope, and financial markets knowing in advance which margins the Bank of England intends to exploit, these spillover effects could be limited.

By being clearer with markets about the intention of monetary policy, the Bank of England’s actions would have stronger intended effects, the paper argues.

Ten years on from the financial crisis, it’s time to look again at whether we regulate lenders and financial markets correctly. The cat and mouse charade of complex banking regulation, setting banks up against government regulators presumed to know all, is destined to fail, the paper says. Referencing Andrew Haldane’s 2012 speech at Jackson Hole, the paper argues that clear, simple and consistent rules based regulation has a better effect than increasing complication as “you do not fight fire with fire, you do not fight complexity with complexity.”

By replacing bank stress tests that straight-jacket bank behaviour with prediction markets, the Bank of England could also help taxpayers avoid future bailouts. Questions could be posed relating to the banks objectives which could be traded on, the paper argues, and so provide real time probabilities of risks that are transparent to all markets. These markets would end up boosting competition and punishing excessive risk taking efficiently and effectively, more effectively than current regulation allows and far better than that a decade ago.

Anthony J. Evans, author of the report and Professor of economics at ESCP Europe Business School, said:

“Since the financial crisis monetary policy has played a reasonable role in stabilising the economy, but only because it has strayed from its conventional remit. Given the damage caused by that remit in the first place, the Bank of England should take the opportunity to adopt a new approach. Reforming open market operations and adopting a Nominal GDP target is effective in good times and bad, and provides a coherent, rule-based framework for monetary stability.”

Sam Dumitriu, Head of Research at the Adam Smith Institute, said:

“Monetary policy should be stable, predictable, and rules-based. The extraordinary policy measures the Bank of England took in response to the financial crisis increasingly relied on the discretion and wisdom of policymakers. Now, nearly ten years since the start of the Great Recession, we should take the opportunity to change the Bank of England’s mandate and reform open market operations.”

Notes to editors:

For further comments or to arrange an interview, contact Matt Kilcoyne, Head of Communications, matt@adamsmith.org | 07584 778207.

The report ‘Monetary Policy After The Crash: Lessons Learned?’ is available here.

With John McDonnell and Jeremy Corbyn saying a Labour government would renationalise energy companies, Matt Kilcoyne says that Labour are onto a loser picking the state just when dynamic markets are what the world needs to go green.

"Labour is right about one thing. The future of energy provision is decentralised, flexible and diverse. But their plans for renationalisation would threaten this by going in the exact opposite direction.

"The state is bad at picking winners, more often it subsidises losers. It is the trial and error of the private sector that will decarbonise our energy supply. Rigid state monopolies rarely innovate, but private sector competition is already driving down solar and wind costs. The freedom to experiment with new business models including dynamic pricing and home battery storage could be key to cutting emissions, but only the market can deliver it.

"The hidden cost of renationalisation is billions of foregone investment, just what's needed to turn our energy production green. Their ideological stance threatens not just our wallets and our ability to keep the lights on, but also how we deal with climate change."

For further comment, or to arrange an interview please contact Matt Kilcoyne (mobile: 07584778207, email: matt@adamsmith.org).

In reaction to the moves by the Prime Minister at her speech in Manchester to announce a consultation for a new offence against online abuse Matt Kilcoyne, Head of Communications at the Adam Smith Institute, called out the dangers of doing so:

"Publish and be damned were the watchwords of our free press, it should be for individuals on social media too. We have laws that govern threats of violence and death threats, we have laws that can punish libelous and slanderous claims. We should be enforcing these existing laws better, not creating a new offence of abuse – an ambiguous term that could easily be used to shut down criticism in the name of being offended.

"This is something that the Lords’ Communications Committee confirmed when they, last year, said they were not persuaded it was necessary to create a new set of offences specifically for acts committed on social media. It is worrying the Prime Minister wants to override this advice in creating a new law to restrict free speech online.

"Social media companies that provide a platform should not held accountable for what users on their sites post, no more so than the Royal Parks are for the views of those at Speakers’ Corner. Facebook, Google and Twitter might be able to afford thousands of staff and millions of pounds to police their users' views to swiftly take down content, but such requirements create a significant barrier to entry and risks hurting disruptive start-ups. Treating platforms as publishers risks stifling innovation and competition as well as free speech."

To contact us to arrange an interview or further comment please do so via either email (matt@adamsmith.org) or phone (mobile: 07584778207; office: 02072224995).

After David Davis spoke in Middlesbrough this afternoon and demanded that during transition the UK be able to draft and sign new trade deals, Matt Kilcoyne says this is both eminently sensible and a good demand for the EU to accept:

"David Davis is right to demand that the UK should be able to sign new trade deals during any transition period after Brexit. The common commercial policy of the EU is designed for members in it for the long haul, but the UK is very much on the way out. Transition is good for both the UK and EU, providing certainty for business and citizens. But if we're unable to shape our future place in the world during this period then it is time wasted and the EU risks a no deal scenario.

"Britons need to start seeing the dividends of Brexit and that means more trade with our friends and allies across the world–a more global Britain, with a new outward focus. Deals show how that can happen. If the EU wants a friendly and close relationship with its largest trading partner, it will need to trust the UK to act in good faith in negotiations with third countries. This is a mature and friendly proposal by David Davis, the EU would be wise to heed it."

Every year Oxfam releases a report criticising the wealth of the richest in the world while ignoring the growth in welfare of the poor. This is a mistake. Sam Dumitriu, Head of Research at the Adam Smith Institute said this means the report is, as ever, exceptionally misleading and misses the point:

"Oxfam’s annual eye-catching wealth inequality stats always paint the wrong picture. In reality, global inequality has fallen massively over the past few decades. As China, India and Vietnam embraced neoliberal reforms that enforce property rights, reduce regulations and increase competition, the world’s poorest have received a massive pay rise leading to a more equal global income distribution.

"Oxfam’s mistake is to see wealth as a fixed pie. More wealth for Zuckerberg and Bezos does not mean less wealth for you or me. In fact it’s the opposite, in a free market individuals can only amass wealth by fulfilling the wants and needs of others. Work and trade does pay out for everyone involved.

"But we don’t really care about inequality, we care about poverty. Every day for the past 25 years 138,000 people have been lifted out of extreme poverty. It's the countries that rejected free markets that have bucked the trend. In Venezuela, the move to socialism under Chavez and Maduro has meant that more than 75% of the population now live in poverty with many unable to afford basic necessities like food and medicine, despite having the world's largest proven oil reserves.

"What we should care about is the welfare of the poor, not the wealth of the rich."

But if it is inequality that we're really concerned with then we have to understand how the figures have come about.

"There is one aspect of the recent rise in wealth inequality that we should be concerned about. Matthew Rognlie, Assistant Prof at Northwestern University, found that recent rises in wealth inequality were driven by housing. As land-use regulations have prevented construction of new homes creating artificial scarcity, housing has become increasingly unaffordable. Reforming planning and zoning law would likely be an effective way of reducing wealth inequality."

For further comment please get in contact with Matt Kilcoyne, Head of Communications at the Adam Smith Institute, via phone (office: 02072224995; mobile: 07584778207) or email (matt@adamsmith.org)

New report suggests a Universal Basic Income (UBI) is the answer to large-scale change from globalisation and automation

New trials in countries such as Canada, Finland, Uganda and Kenya highlight growing interest in Universal Basic Income across the world

Automation, the gig economy and global trade could deliver massive improvements in standards of living but also risk populist backlash from those hit by creative destruction

Luddite regulation and protectionist tariffs, backed by Trump and Corbyn, risk economic stagnation. Basic Income could deliver popular consent for globalisation and technological change

Ahead of Davos, the ASI calls on the world's policy makers to back free trade and innovation, and urges more governments to conduct experiments on Basic Income

Current welfare systems are ill-suited to adapt to the challenges presented by automation and globalisation. That's the view of a new paper from the Adam Smith Institute ahead of the World Economic Forum meeting in Davos next week. Governments should look to Universal Basic Income experiments around the world as they seek to address the risks posed by large-scale changes to the labour market while retaining the benefits of trade and technological progress.

While politicians like Trump and Corbyn might suggest a move to more interventionist and protectionist policies, the paper argues that economic theory and empirical evidence show there are good reasons to believe that a “hands-off” approach would produce superior outcomes.

Fresh experiments are being carried out in several countries to test Basic Income feasibility and how it could be implemented successfully. In Ontario, Canada, the local government is trialling payments to 2,500 people that ensure a minimum income level of at least C$1,320 a month, regardless of employment status. In Finland, 2,000 unemployed people across the country are being trialled with an universal basic income of €560 a month for two years, with expansion to a further 1,000 for 2-3 years if initial results suggest success. In Silicon Valley, Y Combinator (early backers of AirBnb and Dropbox) are funding a long-term study of 2 to 3 years which will ultimately include up to 3,000 individuals.

Yet UBIs are not just limited to rich western countries, small non-means tested payments systems have been trialled in the developing world. In Uganda, the Belgian charity Eight are funding a two-year project in Fort Portal with payments to 50 households of $18.25 per adult and $9.13 per child each month. While in Kenya, GiveDirectly (backed by Facebook co-founder Dustin Moskowitz) is aiming to pay 6,000 people the equivalent of £18 a month over a 12-year period; while at present the scheme reaches just under 100 people it promises to be the largest Basic Income experiment in history.

The paper says countries should see large scale automation not as a threat but as an opportunity, a chance that with Basic Income would ensure that ‘capitalism and efficient redistribution can be vindicated in equal measure’.

The idea of a Universal Basic Income is not a new one. First touted as far back as 1792 by Thomas Paine, the idea is that government provides a regular modest income without any means-testing. Support comes from across the political spectrum. Thinkers like Hayek and Friedman, Martin Luther King and tech superstars Elon Musk and Mark Zuckerberg have all advocated the policy, and even Labour's John McDonnell supports the principle.

Organisations in the UK such as the Buchanan Institute, the Citizen’s Income Trust and Royal Society for the Encouragement of Arts, have called for the idea to be put into practice.

Technological advances, such as driverless trucks, could disrupt the haulage industry but also reduce emissions, road accidents and prices for ordinary people. Basic Income is both politically feasible and financially sustainable, the report argues, smoothing the transition for workers displaced by automation. Short-termist regulations designed to protect jobs from competition risk economic stagnation and mass retraining schemes rarely live up to their lofty promises.

Basic Income could help secure popular support for the changes that automation and globalisation will bring, while cash transfers allow the unemployed and retain the dignity of personal choice. More experiments in how to provide it could help secure the gains of growth for the decades to come.

Sam Dumitriu, Head of Research at the Adam Smith Institute, said:

“New developments in machine learning, from driverless cars to AI medical diagnostics, will change the way we live, work, and play for the better. But they also risk disrupting traditional professions and career paths, from lorry drivers to lawyers. To avoid a populist backlash, we need to design policies for those left-behind by creative destruction. Attempts to protect jobs through luddite regulation will backfire and mass retraining schemes have a shaky track record. Cash transfers are our best bet at ensuring the benefits from coming technological change are felt by everyone.

“We now need to experiment with different ways of doing it – should we tweak the tax credits system, should we introduce a ‘Negative Income Tax’, or is a Universal Basic Income the best approach? And, if we’ve decided on the best way of doing things, what should things like the withdrawal rate be? This paper is a welcome contribution to the debate around welfare reform in the UK and puts evidence at the front and centre of improving policy, just as it should be.”

Otto Lehto, author of the paper, said:

"The theoretical case for unconditional cash transfers over command and control solutions has been strong ever since the birth of welfare economics. Now we have increasing empirical evidence from global field studies to corroborate the desirability of granting people a modest, universal income floor.

"A UBI streamlines the provision of welfare services and improves the autonomy and incentives of individuals. Allowing poor people to spend their money as they see fit stimulates bottom-up market solutions and cuts down on bureaucratic red tape. All this pulls resources away from wasteful rent-seeking into wealth creation."

Notes to editors:

For further comments or to arrange an interview, contact Matt Kilcoyne, Head of Communications, matt@adamsmith.org | 07584 778207.